Brian Stauffer

Bill Taylor didn’t see any other way out of the mess.Looking down the barrel of interest payments on land that he bought in 2006, he sold off five parcels, discounted standing inventory, finished homes that he had started, and closed a company that had produced roughly 200 homes a year. Once complete, he changed the message on the answering machine: Taylor-Morley Homes was out of business.

Meanwhile, across town, executives at McBride & Son, St. Louis’ largest private builder, also faced with a large lot backlog, took the opposite tack. The employee-owned company did more to advertise, promote, and sell new homes than anyone in the market—at the expense of margins, of course. As a result, sales fell only 4 percent last year in a market that produced double-digit declines.

The situation in St. Louis illustrates the kind of no-win choices that builders face as the housing downturn goes into its fourth year. With cash flow dwindling to almost nothing, even among the industry’s A players, builders increasingly are caught between a rock and a hard place. They must often choose between the better of two evils, two outcomes that both harm their company’s financial standing. In the worst case scenario, the decisions may tarnish their reputation among banks, trade partners, and employees.

The toughest decision, of course, is whether to shut the company down. But other painful moves include decisions to close down divisions with significant long-term potential, sell off prime pieces of land, bring in equity partners, mothball half-finished subdivisions, go all in with personal equity, and let go of seasoned managers.

Management consultants contacted for this article agreed that builders did not respond quickly to the downturn to maximize cash flow by selling off land, reducing personnel, and cutting ­expenses. Says Chuck Shinn, a management consultant in Littleton, Colo., “If they haven’t done what they needed to do to weather the storm by now, their chances of survival are minimal.”

Tough Choices Ahead

Steve Alloy, president of Stanley Martin Homes in Reston, Va., expects builder shutdowns and foreclosures to escalate based on his private conversations with fellow builders. Alloy has raised $150 million in equity that he’s been trying unsuccessfully to ­deploy for land purchases in the D.C. market. “A lot of builders started this with a grain elevator full of seed and a barn full of livestock,” says Alloy, whose company is insulated by public debt it floated several years ago. “Now they are facing the decision whether to eat that last seed or butcher the last dairy cow.”

The downturn has pushed many private builders to “the edge of a cliff,” confirms Tom Eggleston, CEO of C.P. Morgan Communities, who spoke on a conference call with investors last month. Eggleston believes that too few builders recapitalized their companies “on a timely basis” earlier this year. Now they are faced with margin calls and further declines in equity that make loan workouts much harder, if not impossible.

John Burns, a management consultant from Southern California, believes the best companies can still work their way out of this mess. He urges builders to work closely with the banks, sell as many homes as possible, find fee work if they can get it, and remain as patient as possible. Burns, who believes that tomorrow’s fortunes may be made in today’s land deals, thinks that now is the time to take on new equity partners to make deals. “Keep your reputation intact so you can attract capital and good people when the market improves again,” says Burns.

That’s essentially what Washington Township, Mich.–based Lombardo Homes did last month when it bought unfinished land, model homes, and lots in 14 communities left behind by Centex in Detroit. The deal, which may make the company the largest private builder in Michigan, was funded with private equity from a local investor. “In the coming years, the Michigan market will provide a rich opportunity for growth and expansion among private companies like ours,” says president Anthony Lombardo.

Learn more about markets featured in this article: Denver, CO.